Friday, September 16, 2011

This story in Reuters meshes with a lot of what Bob Pisani of CNBC is hearing from his contacts on 'the Street' - this whipsaw, headline driven environment is very difficult, and many institutional desks have ratcheted down exposure significantly. When the market is gapping +/- on this headline or that rumor, or even moving intraday on this official saying something or that not saying something - it's not easy on anyone. "Risk on" or "Risk off" moves everything in one direction - and creates a very annoying environment. The correlations are off the charts, and everything is being macro driven. So do not feel bad if you are struggling - this is a tough environment, and frankly 'not fun' for those with time frames over 48 hours.

Volatility in equity markets is burning smart-money players, and even experienced traders are finding it hard to keep up. Some fund managers have been dipping back into stocks to pick up bargains but could end up in a value trap if equities fall into a bear market and the economy falls into recession. Others are taking a wait-and-see approach after getting blindsided by market swings not seen at least since the financial crisis -- and by some measures well before that.

"Gross exposures have come down industrywide and large bets in either direction have also decreased because of the volatility," said Robert Francello, head of equity trading a Apex Capital, a hedge fund in San Francisco. Francello said that as well, short-selling bans on banks in parts of Europe were hurting liquidity "no question."

A recent survey of hedge fund managers found that bearish sentiment rocketed in August to its highest level in a year. (that could be near term bullish) The survey by BarclayHedge and TrimTabs Investment Research showed bearish sentiment rose to 42 percent in August from 27 percent in July.

It also revealed very bearish views on the economy. (that, on the other hand, could just be realistic) About 56 percent think the U.S. economy is already in recession or will slip into recession soon, and just 3 percent say economic growth is set to accelerate.

For Sam Ginzburg, head of capital markets at First New York Securities, where he trades his firm's capital, the "binary" situation is presenting investors with something akin to a zero sum game. He said his fund was still "light" compared with the amount of money he could invest.

One market veteran who runs a proprietary trading firm in New York told his traders they could "go to zero (and) get the hell out of here" in August as the firm's inventories shrunk to just 15-20 percent of what they could be. "It's just like betting on horses," he said. "That two-week period was the hardest I have ever had to deal with."

Joseph Mazzella, a senior trader at Knight Capital, agreed. Knight has one of the biggest retail books in the business and deals with a host of institutional clients. "This is the most difficult trading environment I've ever seen," Mazzella said. "Performance has struggled, it's a really difficult year".

Many hedge funds cut bullish bets that they put on in the first half of the year, and comparisons with the financial meltdown of 2008-2009 abound. "There is a lot of pain out there," said Mazzella. "These guys have just been whipsawed like crazy."

Data compiled by Credit Suisse from filings with regulators show that up until the end of June hedge funds were overweight stocks that are expected to do well in a growth environment. But Pankaj Patel, the Credit Suisse analyst who compiled the data, said given what he is hearing from hedge fund clients, he expects many of them have become much more defensive. "They are not telling us that they are taking a defensive move but talking to them you could sense that," he said. "Before they were not asking about the economy."

"The only thing we see is a very defensive shift: utilities, healthcare, consumer staples; everything else is for sale," he said. "People are playing technology a little bit but everybody's leery so it's very much defensive positioning." "We went from no protection being bought in the market to massive protection, and massive defensive positioning," he said. "So if you want to play the contrarian angle we probably went too far again."

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